Refi wheel keeps spinning as loan rates keep falling

May 24, 2003|By Brian Grow, Special to the Tribune. Brian Grow is a freelance writer.

Sara Wade is proud to be a refi junkie.

When the 32-year-old English teacher and her husband bought their Rogers Park home in 1999, the payments came to $1,400 a month on their 7.5 percent, 30-year mortgage.

Four years and two refinancings later, the Wades are sitting pretty. A new 5-year adjustable-rate mortgage at 4.625 percent cut their monthly payment to $800. It's a refinancing windfall that allowed the young couple to take out a $40,000 home-equity loan last month to help remodel their century-old fixer-upper.

"Refinancing is a totally different deal these days," Wade says. With rates so low, she feels "it's not even risky anymore."

Prodded by still-plummeting interest rates, homeowners nationwide are streaming into banks and mortgage brokers to refinance in record numbers. In the process, they are extending the nation's unprecedented refi boom and propping up the weak economy.

"It's dollars and cents," says Clayton Root, founder of Mortgage Funding Group in Chicago's Lakeview neighborhood, and a 20-year mortgage-lending veteran. "When rates are moving down in big jumps, that's enough for people to perceive real value."

Throughout the Chicago area, thousands of repeat refinancers have been drawn to 30-year mortgages that fell to a record low of 5.17 percent last week, according to a survey by the Mortgage Bankers Association of America. A similar survey by Freddie Mac showed the 30-year average at 5.34 percent this week, the lowest rate recorded by the giant mortgage reseller.

The refinance rush is pumping up mortgage lending almost everywhere. Loan applications rose 9.7 percent in the week ending May 16, and are up 196 percent over the same period last year. These days, 71 percent of mortgage applications are refinancings, according to the mortgage bankers' association.

"Interest rates are now at 45-year lows, and consumers are definitely taking advantage of these rates," says Phil Colling, an economist at the association.

The group estimates that the value of new mortgage loans will top $3 trillion in 2003, up from $2.3 trillion last year.

"We may blast through last year's record by a more than half a trillion [dollars]," says Jay Brinkmann, vice president of research and economics at the bankers' association.

Even economists are getting in on the act. Brinkmann says he refinanced his Falls Church, Va., home last week--the second time in six months.

Locally, the number of serial refinancers is growing, too. That adds to the estimated $5.8 billion in extra cash wrung from the area's refinanced homes in 2002, according to Economy.com, a research firm based in suburban Philadelphia. Nationwide, refinancings have pumped $172.1 billion into the economy, the firm says.

With the costs of raising five children and buying a house in Wilmette looming large, John P. McGarrity says multiple refinancings are helping his family build a nest egg.

In July, the 41-year-old equity derivatives executive at Bank One Corp. bought a six-bedroom house, locking in a 30-year, fixed-rate mortgage at 7 percent. Three months later, McGarrity refinanced, dropping the interest rate to 6.38 percent. He and his wife decided to put the several hundred dollars in monthly savings toward their children's college educations.

Then, last week, the McGarritys refinanced again, locking in at 5.38 percent rate and doubling their savings. And they're not ruling out a fourth trip through the refi mill.

"It was painless," McGarrity says.

Winfield homeowner Rick Vosberg, an executive at a pharmaceuticals company, has refinanced three times in six years. And his broker has been negotiating with several banks to secure an even lower rate.

With closing costs running about $1,500, lenders say refinancing a $300,000 mortgage with a half point reduction in the interest rate can pay off in less than a year.

"It pays for itself so quickly," says Vosberg, who expects to recoup his expenses in six months.

That's exhausting news for many overworked bankers struggling to keep up with what has become a hyperactive business. At Oak Brook Bank, mortgage banker Jim Schutte says the 10-person mortgage-lending staff is stretched to capacity. It now takes 45 to 60 days to process and close a refinancing at the bank, compared with 30 to 45 days two years ago.

"There are many people who are now intensely aware of the opportunity to save money," Schutte said.

But interest rates could sink even lower. Earlier this week, Federal Reserve Chairman Alan Greenspan signaled that deflation fears, coupled with continued economic uncertainty, are unlikely to result in an interest-rate cut by the central bank soon. But Greenspan's words helped send rates on long-term Treasury bonds--a key benchmark for mortgages--to an unprecedented low.

Three years ago, when Bethany Blades, 32, and her husband, Michael, 36, bought their three-bedroom Skokie home, their 30-year mortgage at 8.375 percent cost them $1,950 a month. Now, after two refinancings, their interest rate is down to 6.25 percent, and their monthly payments have dropped to $1,600.

The couple, both teachers, say they know where their $350 monthly savings will go--to buy diapers for their 10-month-old son and another baby due in November.